Question

Interest on Capital is allowed on

• A. the capital at the beginning of the year.
• B. the capital at the year end.
• C. average capital of the year.
• D. the capital in the middle of the year.

Hint:

If capital fluctuates during the year: \[ \mathrm{Interest\ on\ Capital} \rightarrow \mathrm{Calculated\ on\ Average\ Capital} \]

Answer 1

The Correct Option is C

Concept: Interest on capital is generally calculated on the amount of capital employed during the accounting period. When capitals fluctuate during the year, interest is calculated on: \[ \mathrm{Average\ Capital} \] because it represents the effective capital used throughout the year.

Step 1: Understand the basis of interest on capital.
Interest on capital depends upon: \[ \mathrm{Capital\ employed\ during\ the\ year} \] Thus, the most appropriate basis is: \[ \boxed{\mathrm{Average\ capital\ of\ the\ year}} \]

Step 2: Analyze the remaining options.
Capital at the beginning of the year This ignores additions or withdrawals during the year. \[ \Rightarrow \mathrm{Not\ fully\ appropriate} \] Capital at the year end Year-end capital does not represent capital used during the whole year. \[ \Rightarrow \mathrm{Incorrect} \] Capital in the middle of the year Middle-year capital alone cannot determine accurate interest. \[ \Rightarrow \mathrm{Incorrect} \]

Step 3: Identify the correct option.
Therefore, interest on capital is generally allowed on: \[ \boxed{\mathrm{Average\ capital\ of\ the\ year}} \] Hence, the correct answer is: \[ \boxed{\mathrm{(C)}} \]